Mortgage Knowledge at its BEST! Helping those to understand the mortgage process and to show how your mortgage can work for you.

August 2007

August 07, 2007

I wanted to share on how mortgages work, how they are sold on the secondary market, and the reason why some of these companies are closing their doors.

We have seen some major changes in the lending industry, more so
than ever before. What we need to do is stay positive, focused, and move
forward. But at the same time, explain to the consumer what is
happening in the market today, educating everyone on the ins and outs
of what a mortgage is and how it works.

Just a few days ago, Kurt Jackson gave us some insight on what happened to American Home Mortgage. And then Bob Mitchell gave us a better look and understanding on the Secondary Marketingand how this could have affected American Home Mortgage and other companies like it.

What
I want to explain here is how these loans are delivered and where they
end up which as you can see, sometimes can affect the companies that
are on the front line. **I might be leaving some things out just to
make this easier to understand. I might not include all terms.**

The secondary market
can be a twisting ball of confusion at times because of how it is
broken down. Here is a diagram of the mortgage market process by
DiPasQuale and Wheaton from the Urban Economics and Real Estate Markets
research.

The secondary market can be broken down into 2 groups. The "whole loan" and the"mortgage-backed securities" market. You also have bonds backed by loans, but that is for another topic. You need to read Kurt Jackon'sarticle listed above in order to get a better idea of how this works.

The whole market
is where mortgages are sold in blocks of mortgages, sometimes as a loan
by loan basis, depending on the need. These are usually sold to
investors who want to make money from the interest. Why are loans sold
as blocks? I might have 10 loans sitting on my warehouse line, eight of
which are very good performing A paper loans. Two of them might not be
so great, a little riskier. I want to put them all together, as a
block, so the investor will buy all of them, taking a chance, because
they have 80% that are very good.

Mortgage-backed securities are where you have specific insurers such as Fannie Mae, Freddie Mac, and Ginnie Mae
who have guarantees over promises of other investors. This is usually a
more efficient and lower cost of financing in comparison to the other
options. These individuals are what is called "pools of money". Your Ginnie Mae pool is for FHA loans which are backed by the government. The other two are for conventional usage.

These pools are based on default risk which is credit risk and interest
rate exposure. There is another risk that is factored into this which
is the prepayment risk which is called the redemption risk. So many
don't understand that it costs lenders that service these loans money
when someone refinances. Why? Because they are losing the higher
interest of return and because there were initial costs that went into
this loan that is now lost. It doesn't hurt the loan officer, but it
certainly hurts the banks and the market.

The part that is not understood by so many is that there are other
players behind these pools of loans. These could be private investors
that will dissect a loan and buy and sell it in pieces, depending on
the loan itself. Just like when a company buys junk cars, there goal is
to sell pieces of the car, which could bring a larger income than
selling the whole car itself. This is what happens on the secondary
market. These are basically called securities that attract other
investors who would not want to hold onto a whole loan.

What
becomes even more confusing is that there is some sort of food chain to
this. But it works backwards, as shown in the diagram, working from
left to right. Which gets back to when I say investors dissect loans. I
will keep this short so as not to confuse you. This is where the
subprime market came into play. These would be consider B or C loans
within the market. These loans carry more risk but investors are
willing to split them up and sometimes place them into the A group,
which is normally your good performing loans that have less risk with
good credit. When these companies start to close shop per se, they need
to be bought up in the market. This is when someone who usually buys A
paper ends up buying that B loan and tries to sell it in pieces. This
is what ends up driving prices. The video below is from what Mike Mueller shared in his article Asking the Question.

I hope all of this gives you a better understanding of how mortgages work, how they are sold on the secondary market, and the reason why some of these companies are closing their doors. And for another breakdown in layman's terms, Brian Brady wrote : The Mortgage Tax Act of 2007

August 02, 2007

Are you seriously shopping for a house? It doesn't matter if you have done this before or even if you are a first time homebuyer.

If
you have bought before, don't think it's the same way as once before.
The market changes every day. Mortgage programs can change at the blink
of an eye. First time home buyers, just because your friend or family
member had an easy time when they bought their house doesn't mean that
it could be as easy and or simple as their purchase.

The number
one rule of advice, try and get a referral of a good loan officer
before you head out into that jungle. You want someone that is going to
take the time to educate you while giving you options and not someone
that is worried about their own pockets. Make the effort to obtain a pre-approval.

What is a pre-approval? It's one step ahead of being pre-qualified. This is a must read. The difference between a Pre-Approval and a Pre-Qualification letter.
For a short breakdown of this article, a pre-approval is worth a hole
lot more in most cases than a pre-qualification. You actually go
through the process of buying a home without having a home in mind and
or contracts. Why is this a good choice?

-- Right
now, it's a buyers market for the most part. If you place almost the
same bid on a property, but your did/offer is accompanied by a
pre-approval letter instead of a pre-qual letter, you might have a
better chance. (I have had clients in the past whose offer was slightly
lower, but it was still accepted because they were approved already)
There are many reasons why for this.

-- Many programs have been changing as of lately and it's a good idea to see what you can be approved for now instead of later.

--
If you are a buyer that doesn't have much money to work with and
possibly average credit, you might need 100% financing. This can only
be approved by an online service and not by the naked eye. Better to
know now than later.

Overall, understanding your options
and how the financing process takes place is the most common mistake
made amongst buyers. No, I am not saying that you need to be an expert.
But why not become slightly educated on how the process works? Why not
be one step ahead of everyone else.

Conclusion : What I am about to state is from
experience and past clients. This just happened again as of today. Keep
these next few thoughts in the back of your mind as you seek a
professional in the mortgage industry.

Don't fall for those that don't spend much time with you asking you questions and your goals. This is so key.

Watch out for someone that acts as a true sales person. Someone that uses such words as or phrases as : "I promise", "I guarantee", "don't worry", "not a problem", ...and some of the worst? "I am the lowest", "I have the best rates and or fees".... and "TRUST ME".

Don't
fall for someone that says they will take care of you just because they
are a manager or possibly the owner. They shouldn't have to use their
title to make you feel comfortable or like you will get a great deal.
This is sometimes called sales.

A good faith estimate that is actually missing lots of information or figures if you are shopping this form.

A good faith estimate that is partially hand written and the rest typed in.

Overall,
use your gut feeling at times. Don't be afraid to ask many questions.
And if you get someone that is hard to reach, this could be a red flag.
Especially once you start the process with that loan officer. If they
were easy to reach prior to application, but now don't return calls or
e-mails like they did in the beginning... BIG RED FLAG.